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Tuesday, September 27, 2011

HL Industries reduced biz diversity a concern

KUALA LUMPUR: RAM Rating Services has reaffirmed the ratings of HONG LEONG INDUSTRIES BHD []'s RM500 million debt notes but it is concerned about the group's business diversity and weaker earnings.

The ratings agency said on Tuesday, Sept 27 it kept HLI's AA3/P1 ratings for the RM500m Islamic commercial papers/medium term notes (2008-2015). It said the long-term rating had a stable outlook.

HLI's is involved in the manufacture and trading of building materials and also the manufacture, assembly and distribution of motorcycles. The group recently exited the semiconductor business via a corporate exercise, while simultaneously enlarging its building-materials segment.

RAM Ratings' head of consumer and industrial ratings Kevin Lim said following the substantial completion of HLI's corporate exercise 'we expect its financial profile to remain strong following its considerably lower debt level'.

He said the group's debt-coverage metrics were expected to stay robust despite weaker cashflow.

'However, RAM Ratings has a less favourable view of HLI's new business profile because of the Group's reduced business diversity and the anticipation of its weaker earnings,' Lim said.

RAM Ratings believed HLI's lighter capital expenditure and working capital may ease the group's gearing ratio to 0.2 times, with its corresponding funds from operations debt cover ratio approaching 0.7 times within the next two financial years, barring significant debt-funded investments. This is complemented by the significant financial flexibility derived from its unencumbered assets and close relationship with the larger Hong Leong Group.

HLI has a sizeable market shares in the tiles, fibre-cement and pre-cast concrete businesses. It is the second-largest player in the domestic motorcycle market, holding the exclusive franchise for Yamaha motorcycles in Malaysia.

'On the other hand, the ratings are moderated by the Group's increased exposure to the inherently cyclical CONSTRUCTION [] sector, following its reduction in diversity from three businesses to two,' said RAM Ratings.

The ratings agency said while both the semiconductor and building-materials industries also exhibit cyclical natures, the former had provided HLI some diversity as it is less correlated with the cyclical trends of HLI's other businesses.

However, an evaluation of HLI's pro forma historical earnings incorporating its new business structure has not revealed a more volatile performance. The building-materials sector is also viewed to be keenly competitive.

It also noted HLI was susceptible to margin fluctuations arising from the volatile steel prices faced by its motorcycle operations and newly acquired pre-cast concrete business.